HC 1652 Communities and Local Government CommitteeWritten submission from East 7

East 7 is grateful for the opportunity to contribute to the Communities and Local Government Select Committee inquiry into the Financing of New Housing Supply.

Policy relating to housing finance is of the highest interest to East 7 and its tenants. For the purposes of this inquiry, we will focus on six main points in this paper which presents our response to the questions posed:

(1)Affordable Rent.

(2)Long-Term Private Finance.

(3)Universal Credit and direct payments.

(4)Availability of land.

(5)Targeting of limited capital/public subsidy.


We would of course also be very happy to provide the Committee with Oral Evidence, should this be helpful.

We hope the Committee finds our comments useful.

About East 7

East 7 is an informal alliance featuring nine of the largest developing housing associations based in the six counties that comprise the East of England.

The creation of East 7 was driven by the high demand for affordable housing but lack of supply in the area. In the East of England the ever increasing imbalance between average household earnings and the costs associated with buying a home mean that many households cannot get a foot on the housing ladder and is the cause of overcrowding and homelessness.

As a result, we felt that housing associations across the region needed to come together to continue to play a vital role in providing homes at sub-market rent or part-purchase to households who would otherwise be unable to find housing.

Our members are Aldwyck Housing Group, bpha, Circle, Crosskeys, Estuary, Grand Union, Hightown Praetorian & Churches Housing Association, North Herts Homes and Swan Housing Group.

Together, we manage over 135,000 homes across the East of England, and in the last year alone we built over 4,000 homes and re-let 8,613 properties. Collectively our members currently employ more than 4,000 people.

Executive Summary

Housing associations will not be able to charge 80% market value rates in all areas. As a policy, it is also unlikely to cover the loss in funding and may have unintended consequences.

There is an urgent need for policy certainty around the levels of capital funding that will be available to housing associations post-2015. If the Government is committed to tackling the huge under supply in housing, a consistent approach to delivery is required. A stop-start approach could be disastrous. Housing associations need to be able to plan for the future, both in terms of their structure and the focus of their activities, and in order to have the confidence to approach markets for private finance.

The Government needs to allow flexibility of financing and allow housing associations to explore innovative funding, such as disposal and management of assets, issuing bonds, subsidisation through private arms of housing associations, and institutional and private investor borrowing.

Direct payments under universal credit will create funding uncertainty with lenders at a time of economic turmoil and potentially will increase management costs and risk for landlords.

More pressure needs to be brought to bear on local authorities to release land for the generation of housing supply, and wherever possible this should include the potential for Build Now, Pay Later or similar mechanisms which will enable development.

Where limited capital is available, thought must be given to focussing it on those areas of high demand, that are key engines of growth.

1. Affordable Rent: 80% Market Value Rent

East 7 acknowledges that the affordable housing sector must recognise the constrained fiscal environment in which we are operating in. As a result of this, the Government must prioritise how resources are used in order to ensure value for the money it spends and there is a need for an increased role for housing associations, and other non-state providers, to assist the Government in achieving this.

Prior to the election, and then subsequently, we advocated granting housing associations flexibility over tenants’ rents in order to generate additional resource. Our recommendations focused on enabling housing associations to generate additional resources to invest in local priorities, and reintroducing a degree of rent flexibility to enable housing associations to invest in improvements to housing without over-reliance on government funding.

We therefore welcomed the Government’s move in this direction with the introduction of the affordable rent, albeit with greater restrictions than anticipated on how that income stream is used.

In coming years, we hope the Government will consider allowing greater flexibility so that housing associations can invest the revenue in ways that are best suited to the needs of the local community, rather than just new build. For example, by developing green spaces and playgrounds; making a range of improvements to existing homes, such as building extensions to increase occupancy-capacity and incentivising under-occupiers to voluntarily down-size to free-up much needed capacity for families and develop green spaces and playgrounds to create vibrant communities.

In terms of its implementation, the majority of our members are likely to be able to charge their tenants the 80% market value rent. However, in areas of higher demand and higher rental prices (eg Cambridge), we will only be able to charge 50–60% market value due to affordability and local housing allowance constraints.

We would caution however that even in those areas where larger revenues will be created as a result of the 80% market rate, there will remain a significant funding gap created as a result of the decrease in capital grant. One reason for this is that the 80% market rent value includes service charge, whereas the social rent calculation adopted by the Government does not. This is especially significant, as it impacts most heavily upon the smaller units which are most needed in terms of combatting under-occupancy. This means the actual income for housing associations is lower than estimated by the Government. This is likely to lead to longer term reduced capacity in the sector and thus leading to funding problems for increasing housing supply if the current system continues.

It is this on-going policy uncertainty around the availability of capital grants, which severely restricts housing associations in their long-term planning. We are keen to understand government preferences for capital or revenue support to enable the provision of more affordable housing in the post-2015 models—and in this regard how flexible the Treasury may be in considering options which may include tax breaks to encourage investors, the use of social impact bonds (see section 2), or measures which may impact on housing benefit—or whether there will be a re-thinking of the role government wishes to play in the provision of housing, and whether there will be a shift in focus from increasing supply and with it the benefits of an economic stimulus to increasing the quality of existing stock.

As a further issue, East 7 members are also concerned that those on the social housing register may not believe homes offered at 80% market value rent is a viable option for them. This is because of the added risk that, if they do accept and find employment, housing benefit will be withdrawn and they will be left in a worse financial position with high rent. Housing associations must therefore address the question of who affordable rent is aimed at, for example, should working families be a priority, or should there be an affordability policy eg 35% of income.

Finally, how far each association will be able to travel down the path of higher rents for a greater proportion of their residents will depend on their understanding of their social purposes and objectives, and we may be entering a period during which housing associations must think long and hard as to its target “market”.

2. Long-Term Private Finance

Bank Lending: In the current financial climate, it is becoming increasingly difficult for housing associations to provide the type of security which lenders are looking for.

Recent research by Policis showed that 35% of tenants are not confident they would be able to keep up their rental payments, further compounding fears by banks that the stability of housing association’s rental income would be impacted upon by benefit changes (see section 3). Housing associations thus become unattractive borrowers and a significantly higher risk.

This new position is worsened by the lack of certainty around capital funding, meaning housing associations are unable to provide a solid business plan post-2015 (see section 1). If there is inadequate capital, housing associations may well face higher lending rates, tied to the increased risk. In addition, in the mixed tenure business, the lack of mortgages available to first time buyers will impact upon, and limit, cross-subsidy options.

Private Rented Sector: Expansion into the private rented sector has been a limited, but viable option for some housing associations and there remains throughout the country, a demand for good quality landlords. Indeed at least one member of East 7 has been successful in doing so, holding around 200 market rented homes.

However, due to restrictions in place on charitable bodies and private income, there is a limit to which this can generate income before becoming a threat to charitable status.

With increasing scrutiny of standards in the private sector, Government may wish to look again at providing an incentive for housing associations to increase their involvement. Housing Associations are well placed to provide a service for private markets and assurance to government of an accredited landlord service.

Even if the Government does not wish to go down this avenue, East 7 believe that more attention needs to be paid to ensuring high standards in the private rented sector—with over half of the housing benefit bill being paid to private landlords, it seems anomalous that the requirements that social landlords are expected to fulfil are not also demanded of the private rented sector.

Bonds: A number of East 7 members have now moved to issuing bonds or other means such as private placements to access the capital markets to raise capital to support new house building programmes. However, raising private finance in this way is currently restricted by its attractiveness to investors. It is not currently tax efficient for the bond-buyer, so return on investment for them is not as high as it could be. Once again, the attempts of housing associations to bridge the funding gap are artificially constrained.

Tax-exempt retail Bonds: Retail bonds could also be considered by the Treasury as a potential way for individual investors to support housing associations and the development of their communities. As housing associations are not for profit, we would suggest that these bonds are made tax-exempt, to provide a strong incentive for individuals to invest in a good cause which will still generate a healthy return, as opposed to a for-profit organisation. This would assist in bridging the funding gap, with a limited burden on the Treasury, while still providing much needed social housing.

Social Impact Bonds (SIBs): East 7 is also interested to understand whether the Department for Communities and Local Government will, like other Departments, be considering the potential for Social Impact Bonds following trials in the East of England at Peterborough Prison, and with some key local authorities.

As a form of payment by results, but with upfront funding for particular initiatives, it is worth exploring further whether the impact that good social housing schemes—where architecture is used to design out certain social problems combined with support services that housing associations can provide—could be supported by SIBs. This would drive innovation and a focus on how initiatives could be joined up to tackle for example worklessness, or ill-health, and the social problems which are often concentrated amongst social housing tenants, whilst insulating the Government from the cost of paying for ineffective schemes.

We do not envisage that this form of funding could be used to generate a large supply of housing stock, but believe it is worth exploring both in terms of driving innovation and best practice. For example, the funding could benefit supported housing which is more expensive than mainstream housing. This type of housing requires higher management, repair and maintenance costs, which may act as a disincentive to housing associations to provide such accommodation. Yet, there is a real need for housing associations to build supported housing such as sheltered accommodation. Supported housing incentivises older tenants to down-sizing and can thus free up much needed larger housing units. Increased focus could also be concentrated on the wider impact of housing on communities and life chances. Much will depend on agreement on outcome metrics and a methodologically robust approach.

East 7 therefore calls for willingness by the regulator and the Government to explore lateral funding, as the current model could act to restrict any genuine long-term financing opportunities for housing associations.

3. Universal Credit: Direct Payment to Tenant Policy

East 7 understands the intentions of the Government in introducing the universal credit, but does not support the proposal to make direct payments to residents the default position. Direct payments to the landlord can be a prudent household budgeting mechanism for low income households in the same way as direct debit payments work for mortgage holders. As benefit accounts (for those tenants who would not automatically qualify for a bank account) do not currently have the option of a direct debit facility, in our view, direct payment to landlords simply replaces this facility for social housing tenants and helps tenants avoid arrears as their rent is paid automatically and on time.

Although reassured by Lord Freud’s comments at the National Housing Federation (NHF) Annual Conference in September, direct payments will lead to an increase in rent arrears. This increases risk to housing associations’ income and therefore decreases the chances of continued funding from lenders (see section 2).

Moreover, research by Policis (commissioned by Big Issue Invest, a financier of social enterprises and supported by the NHF) has found that tenants do not want the burden of direct payment. The national survey of 1,000 social housing tenants found that 80%1 of tenants surveyed, thought the Government’s proposal to pay housing benefit direct to tenants was a “bad idea”. In addition, 35%2 of tenants are not confident they would be able to keep up their rental payments. This confirmed fears of lenders that the stability of landlords’ rental income would be impacted by the changes.

In addition, tenants have further concerns regarding how housing benefit is paid: the payment will move from fortnightly payment, to monthly. Over half (54%)3 of tenants believe under this system, it would make it more difficult for them to manage their money.

If the Government insists on moving forward with direct payment, we would be keen to see a trigger mechanism developed to stop payment if default occurs. This should be as early on in the default process as possible to prevent large financial shortfalls. Whatever trigger is decided upon, it needs to be a simple mechanism that both housing associations and tenants can clearly understand. For example, a “three strikes and you’re out” rule.

4. Availability of land

Planning Reform: To support the call for affordable housing, there needs to be more land made available to provide affordable homes. We believe that housing associations are capable vehicles for delivering positive outcomes and value for money solutions to both central and local government. The identification of land by the DCLG which will be made available for housing is very welcome but, with much more land held by local authorities, does not go far enough. We also recognise the dilemma facing both central and local government in respect of the disposal of these assets at commercial or reduced values. We believe that future housing and financial strategies need to give close consideration to the potential impact of both options.

The Government’s initiative to survey and log previously developed land which is now vacant or under-used owned by local authorities will help to some extent, as will new powers such as the Community Right to Reclaim Land, and reform of the Public Request to Order Disposal Process. The latter will, it is hoped, reinvigorate local communities into action using these powers.

However, East 7 would question whether the reformed Public Request to Order Disposal process, routed through the Secretary of State, on a case by case basis will generate the land necessary for housing need. To ensure progress, East 7 would recommend increased pressure on local authorities to voluntarily release land for development, preferably on a Build Now, Pay Later or discounted value alternative scheme which will favour the development of social housing. This would alleviate some current housing pressure and stimulate the construction industry, as well as reduce the potential for housing associations to have to spend an increasing amount of resource on developing the case for the disposal of land

5. Future targeting of limited capital

Housing Grant: Any current or near future uncommitted housing grant should be focused where there is highest demand for affordable housing: there is no easy way to change the natural flow of tenants and even when given freedom of movement, tenants will move where job opportunities are high—but this also means housing prices reflect this.

Concentrating limited capital on those areas which are key engines of growth, such as the East of England, will deliver a more profitable outcome for the country, the economy and provide the workforce to achieve growth in these areas.

6. Right-to-buy

Briefly, following recent announcements regarding extending right to buy and the increase in the discount, it is worth being aware of the impact this may have on housing associations (due to its application to stock transferred from councils). It will affect housing associations asset base and their ability to leverage finance.

October 2011

1 http://www.insidehousing.co.uk/tenancies/most-tenants-want-housing-benefit-paid-direct-to-landlord/6517756.article

2 Ibid.

3 Ibid.

Prepared 1st May 2012